The concept of a loan modification is not new. In fact, its been a useful part of the lending business for years. This relatively obscure phrase has now taken center stage as a result of the weakening economy. Now considered common language, loan modifications are becoming useful tools by lending standards help borrowers who are having difficulty keeping up with their mortgage payments.
By definition, a loan modification is simply a change or adjustment to the original mortgage agreement that was secured during the purchase or refinance of an individual's property. The last time you closed on your home you were required to sign a document called the Note. The promissory Note details the terms of how the loan is to be paid back. It shows information which includes, monthly payments, term and final payment date. When this note is changed the result is called a modification. Common changes made to Note might include lowering the interest rate, a principle reduction of the balance or a change in the terms of the loan. In many cases it is a combination of each.
Basically, modifications occur due to negotiations with your bank. Most people think that paid professional services are responsible for the results of a modification, but this is not true. Professional services mealy act on your behalf. They typically will charge $1,500-$3,000 for their services, with no guarantee of a specific outcome. In reality, only your lender is authorized to change or modify your note. Any result or outcome from a loan modification will ultimately come from your lender. When completed, the results are usually dramatic. A reduction in monthly payments of 35% or greater is very possible.
Well, if this explains how a loan modification works, then why would a bank even do one? The benefits to the consumer are obvious. You might be surprised to learn that the bank wins here too. A restructured loan means a better performing asset and less risk for delinquency or foreclosure. Think of it another way. If you were a landlord and had a tenant who was struggling to make the rent payments, reducing the rent might be a way to keep a good tenant and avoid the hassle of an eviction process and finding a new renter. Usually, the Banks belief will be 'a partial payment is better than no payment at all'. It is for this reason that loan modifications can actually have successful results.
Right now, mortgages rates are less than 5%. If you have a rate that exceeds this amount, you could stand to benefit tremendously by renegotiating your loan. It can be an easy decision for your bank as well because they are not taking any major concessions either. They are just bringing your rate down to market levels, so it is no big loss for them. As a result, your mortgage payments are less, the Bank's default risk declines and it's a win win situation for everybody.
Qualifying for a modification is completely different than qualifying for a refinance. Don't be reluctant to contact your lender because of your credit, job history or lack of home equity as these things are really not considered negative factors.
Once you have decided to move forward, the only other consideration is whether to hire a professional or do it yourself. As I mentioned before, since the bank will determine your eligibility, you really can do it on your own. With just a few hours of invested time, the same results as professional services can be attained.
A final note, before you contact your bank is important that you have a basic understanding as to how a modification works and how the bank will qualify you. Understanding this is the key to increasing your chances of getting approved.
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J. Pisicchio is a mortgage & loan modification specialist with 20 years experience. He has worked for both small banks and large institutions (Chase). As a trained credit analyst, he has used his experience to help others find the best possible methods to reduce their mortgages. For information on -
how does a loan modification work visit modifications visit,
www.mortgageloanmodificationsecrets.com
